Canada Housing Heads for Severe Correction on Investment: Chart of the Day

By Doug Alexander and Ilan Kolet -
Feb 17, 2012

Canada may be on the cusp of a
“severe” housing correction as real estate investment surges
above a tipping point relative to economic output, according to
George Athanassakos, professor of finance at the Richard Ivey
School of Business.

The CHART OF THE DAY shows Canada’s housing investment as a
percentage of gross domestic product, and the declines in
inflation-adjusted house prices that follow when this ratio tops
7 percent.

“Eventually, everything boils down to demand and supply,”
Athanassakos said in a telephone interview from Western
University in London, Ontario. “Whenever this ratio goes over 7
percent, it signifies overinvestment in housing and two or three
years later, we have a severe correction.”

Canada’s housing market is booming as historically-low
interest rates fuel purchases, driving up home prices and adding
to record household debt. Canada’s ratio of housing investment
to GDP has averaged 5.8 percent over the last 50 years and is
currently at about 7 percent, based on Statistics Canada figures
as of the third quarter of 2011, Athanassakos said. Housing
investment includes spending on new homes, renovations and real
estate transaction fees.

U.S. housing prices plunged by a third between the peak in
July 2006 and November 2011, according to the S&P/Case-Shiller
Composite-20 Home Price Index. By comparison, Canadian housing
prices rose 30 percent in the same period, according to the
Canadian Real Estate Association.

“We have experienced bubbles and busts before in Canada,
it’s nothing new,” Athanassakos said. “I don’t know why this
time would be different.”